In financial circles, the middle market sector is viewed as having three distinct segments. Companies with EBITDA below $10 million are termed as ‘lower middle market’, those with an EBITDA of $75 million or more as ‘upper middle market’ and companies that fall within $10 to $75 million of EBITDA, as the ‘core middle market’. Lower middle market companies are typically family or entrepreneur owned, and in most global economies,the lower-middle market accounts for more than an estimated 90 percent of the total number of all middle-market companies. However, such companies are often stuck in no man’s land, since they are too small to be an impact full acquisition target for sizable strategic buyers or private equity groups but too large for an individual buyer to finance.
Listed below are three financing structures that a lower middle market company can consider.
Otherwise known as senior debt, bank financing is most commonly available on the amount of tangible assets that can be pledged as security on the loan. Bank loans are pretty straightforward. For example, during the purchase of a business with a negotiated purchase price of $10 million, if the company has $8 million in assets, an acquirer will be able to obtain bank financing for the collateral value of those assets. If the collateral value is $7 million, that is the amount of financing available. On the positive side, this type of financing is the most affordable for a lower middle market company. On the negative side,this type of loan is often outside the reach for many asset light service or technology companies . These businesses simply lack hard assets collateral value and banks are not able to lend to them.
Also known as subordinated debt, mezzanine financing is a hybrid of debt and equity financing and allows buyers to retain major control of the business. For a well-managed lower middle market company with strong cash flow and good business prospects, mezzanine financing can be a smart solution for a variety of liquidity or expansion needs. With a mezzanine loan, a lower middle market company can gain capital funds which can fuel their acquisition or internal growth. Mezzanine loans are significantly less expensive than raising equity and are a good source of long term capital. These loans receive less rigid terms when compared to senior debt, and most important of all, avoid unnecessary dilution from new equity.
An emerging force in the market, unitranche loans can be a boon to lower middle market companies who have failed to get senior debt and yet are hesitant about mezzanine financing. In layman’s terms a loan is determined a unitranche facility when a single lender provides the entire credit and works with the borrower. The lender then slices up, or “tranches,” the loan for other investors. To a lower middle market company the advantages include a one-stop shop for the entire financing, a reduced risk that the deal will fall apart, quicker closing, less syndication risk and most important of all a better chance of acquiring a greater amount of senior debt.
Attract Capital has 25 years of experience in helping private companies access mezzanine and unitranche funding directly from lenders. With a lender platform of over 100 financing providers and a proven work flow process, Attract Capital can provide quick sourcing solutions for your various funding needs.
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